Building blocks in biotechs

The biotech sector has a reputation for producing cash burners, but the strong performance of big names in the healthcare sector means many other companies in the health industry have had a very good year.

“Healthcare has had a spectacular run this past 12 months,” UBS strategist Andrew Goodsall says. “Relative to other sectors, it is fairly defensive, more resilient and less subject to cyclical factors.”

The success of larger companies has put smaller biotechnology companies on investors’ radar. “Biotechs this year have really found a good support base among the institutional investors because you’ve had success stories like Sirtex and Mesoblast, from R&D or stock share price success,” Goodsall says.

But not everyone is convinced the biotech sector has become permanently safer for investors.

“The market is so thin in Australia that these companies get easily overpriced,” says Eley Griffiths Group portfolio manager Brian Eley. “There is no knowledge or understanding of the risk. The pitches are always about the return and not about the risk, because it’s a sector where you have to be very lucky or very smart.”

Most of the smaller companies need to have earnings before they can hold the attention of the wider market, which is hard because most biotech companies don’t make money to start with. And they are infamous for running out of cash before they make returns.

But some biotechs have become building blocks for success.

Starpharma (SPL)

Apart from a slight hiccup over May and June, this company’s share price has been on a steady upward climb over the past year. Starpharma Holdings has also outperformed the All Ordinaries, Small Ordinaries and Healthcare indices consistently over the past few years.

Morningstar Equities Research expects partnering deals in the 2013 and 2014 financial years to increase SPL’s cash reserves.

Nomura says the company has sufficient cash to fund its VivaGel Bacterial Vaginosis clinical trial.

Some domestic partnerships are also helping the company. It recently signed a deal with Ansell to coat condoms with unguent (a soothing salve or ointment).

Earlier this month, it also signed an agreement with manufacturer Nufarm. The deal involves supplying technology to develop crop protection.

Eley says Starpharma has done a good job at getting where it is today. “Starpharma is very professional and focused. It is also very commercially orientated,” he says.

“It would be one of the organisations in the Australian biotech sector that has a better chance than most.”

The share price closed yesterday at $1.45, up from $1.19 a year ago. Analysts have a 12-month consensus price target of $1.88.

Acrux (ACR)

Despite some tough competition, Acrux had a solid result for the 2012 financial year.

RBS downgraded the company to “hold” from “buy” due to the competition and more rebates but notes that the company “is positive that its US core patent will be extended and the rebating is expected to moderate over FY13 [2013 financial year] and FY14.”

In 2010, Acrux signed a licensing deal with American pharmaceutical company Eli Lilly, which resulted in its testosterone treatment, Axiron, being marketed globally.

“Eli Lilly has the rights to market the product,” Eley says.

“Their unique selling proposition is they have a concentrated underarm application. They have a reasonable market share, about 12 per cent, so they are getting paid.”

But discounting of the product to United States health insurers to help generate that market share needs to be considered, Eley says.

“They are competing against big pharma and those guys have got the biggest product in the market, which has a 60 per cent share, called AndroGel, which is marketed by Abbott. And they don’t let that position slip lightly.”

The stock closed at $3.17 yesterday, while analysts have a 12-month consensus target of $3.24.

Alchemia (ACL)

Alchemia posted a net loss of $15.1 million for the 2012 financial year but analysts say its upcoming demerger of key businesses in 2013 will unlock value and move the share price up.

The drug developer has announced it will demerge its oncology (cancer) business to form a new company and list it on the United States market.

Eley says many biotechs and health companies choose to list in Canada or the US because market opportunities are so hard to come by on the Australian sharemarket.

“Do we in Australia have a company like Abbott or Lilly or anyone like that? We don’t, and there is a reason for that.”

The stock closed yesterday at 58¢, a rise of about 25¢ on a year ago. Analysts have a 12-month consensus price target of 82¢.